Chapter 16

Accessing Scholarships and Awards

In This Chapter

Figuring out where the scholarship money is hiding

Trading service for college funds

Considering the tax consequences of scholarship money

Maybe you’ve been carefully saving for the day your child begins college, or perhaps you’ve worked on the assumption that Bruiser is going to be the starting nose tackle for a Division I school’s football team and will receive a full athletic scholarship. No matter which category you fall into, as you move closer to that fateful day, you may find that your planning hasn’t produced the desired results. Maybe the stock market didn’t perform as well as you’d expected, or Bruiser is actually more comfortable ripping the guts out of a computer than a live opponent. As you look at that first tuition bill, you may realize that you don’t have enough saved, and you can’t possibly make up the full amount of the difference from your current earnings.

Now, you could panic — after all, you’ve told your child all along that you expect him to attend college and you’ll somehow find a way to pay for it. A better option, however, is to take that same energy and begin researching what available free, and not-so-free, money is out there in the form of outright grants, scholarships, fellowships, and guaranteed payments for service, just waiting for your child to apply for it.

In this chapter, you discover the different groups and organizations that have money available to help you with those college expenses. You also find out what your student needs to do to qualify for that money. And you explore the differences between scholarships and low-cost loans in exchange for service commitments as opposed to outright grants that have no strings attached. Finally, you look at what tax consequences, if any, there are when your student receives scholarship aid.

You may also want to check out Free $ For College For Dummies, by David Rosen and Caryn Mladen (Wiley Publishing, Inc.), for more detailed tips and strategies on seeking out scholarships and grants.

Searching for Scholarships, Fellowships, and Grants

Fortunately, finding sources of free money isn’t nearly as difficult as finding the lost ark or the sales receipt for the toaster that blew up the first time you used it. You just need to know the different places to look for the money.

Before you start your search, though, you should be aware that the words scholarship, fellowship, and grant are often used interchangeably by various organizations, but they essentially refer to the same thing: money that the organization provides to your student for higher education expenses without any expectation on the organization’s part that they will be repaid. These terms do have some subtle differences, however. Generally speaking, a scholarship is paid to undergraduate students, a fellowship goes to graduate or postgraduate students (often with a research or teaching requirement attached), and grants are usually associated with need (but scholarships and fellowships may also be need-based). The basic theory is the same, however.

You may think that your child isn’t smart enough, talented enough, or poor enough to warrant someone else picking up even a part of his tab at college, but you’re probably wrong. Money is available from a wide variety of sources, and it runs the gamut from small stipends to full tuition grants. Many of these aren’t based on either ability or need; they merely require that you apply for the funds. Do your research and check all available sources — you may be quite surprised to find out just how much money is out there. Use the info in this section as your guide for searching out the possibilities.

When conducting your search, keep track of all the different ways that your child may be able to access scholarship money. Scholarships are awarded not only on merit and need, but also on the basis of residency, ethnic or religious background, college choice, career path, and whether he is left-handed. Some scholarships are awarded only to incoming freshmen; others don’t begin until a student’s senior year. Don’t assume that your child won’t qualify; instead, work on the assumption that, if you dig hard enough, something out there has his name written on it. And, if you fail this year to snag some funding, don’t give up — as any good Red Sox fan knows, just wait until next year.

Beware of scholarship scams, where for a small (or large) entry fee, your student is guaranteed a scholarship, or given access to scholarship information that is supposedly not available for free. Remember, all scholarship information is free for the asking, and you must apply to the scholarship directly (not through any middleman) for the grant. Anyone who asks for your credit card information or charges you a fee for any scholarship-related service is scamming you. Always keep in mind that scholarships are a classic case of receiving money on the basis of hard work, good looks, talent, or a combination of the three, and nothing else; there should be no need for you to pull out your wallet at any point in the application process.

Looking to your child’s prospective college

Begin your scholarship search at your child’s college, both in the admissions and the financial aid offices. Every college has a list of scholarships that are available if a student applies for them. Some of them are well known and very prestigious; others, though, are buried in obscurity, and you just have to be proactive enough to look for them and apply. Although the size and seeming abundance of the athletic scholarships have become the stuff of legend, your child may also qualify for academic scholarships.

Both athletic and academic scholarships are generally awarded before your student even begins his college career, and they need to be renewed for each subsequent year. Substandard performance may lead to a reduction in, or even total loss of, the scholarship.

Don’t forget, though, that there are often smaller scholarships awarded to students who have already proven themselves at the college level. The annual history award may not carry much cachet outside the history department, but that’s real money they’re handing out with it.

Working with your employer

Two of the most worthwhile benefits an employer can offer are scholarship programs for the children of employees and tuition assistance programs for employees. These programs provide the company with valuable tax deductions and give huge boosts to the educational plans of their employees and their children.

Even if your employer doesn’t directly offer either a scholarship program or some form of tuition assistance for employees, if you’re a member of a union, the union may provide some aid. Assumptions that your union doesn’t have anything like this in place will only hurt you — check with your union representative and find out.

Employer-sponsored scholarship programs

Company-sponsored scholarship programs generally aren’t need based at all but are rather merit based. What company, after all, wants to admit that it doesn’t pay its employees enough to enable them to easily send their children to college? The fact that these scholarships are merit based doesn’t mean that your student needs to be a genius (she is, after all, competing only against other children of people employed by the same company). It does mean, however, that she must maintain reasonable grades in high school; she also may have to complete an application, take a test, or both.

Most of these programs don’t provide full tuition assistance; instead, they usually give a more nominal amount. Still, any money that you receive will supplement what you’ve saved, and it may just bridge the gap between your savings and your student’s potential costs.

The existence of a scholarship program may be buried deep inside your employee manual. Check with your human resources department to find if your company has such a program in place, what the requirements are, and what you and your child must do to apply.

If you’re fortunate enough to work for a college, the most valuable benefit your employment contract contains may be that you, your spouse, and your children can attend that institution tuition-free and tax-free, or at least at a discounted rate. Unlike corporate and union scholarships, these tuition reductions aren’t based on merit, but rather on your employment.

Help! We won too much money!

What if you’ve managed to save the necessary amount of money in either a Section 529 plan or a Coverdell Education Savings Account (ESA), and all of a sudden, a full scholarship lands in your student’s lap? Well, first thank your lucky stars that you’re one of the few who get to have this problem, and then consider your options for what to do with the unneeded savings account. You may choose any one of the following courses of action:

If your student has dreams of graduate school dancing in her head, keep it safely stashed for that day. Remember, Section 529 or Coverdell plan funds can be used to pay for all postsecondary qualified educational expenses, not just undergraduate school expenses.

Distribute the money to your student or to yourself after graduation. Remember, though, if money is left over in either your Section 529 plan or your student’s Coverdell ESA after he’s completed his education, distributions to either you or him will result in income tax owed on the earnings plus a 10 percent penalty.

Make distributions to your student in the years in which he receives his scholarship. By making distributions in these years, he’ll pay only the income tax, but no penalty.

Roll the account over to a new beneficiary. By changing the designated beneficiary (see Chapters 5 and 8 for lists of who qualifies) and then using the money to pay qualified educational expenses for that student, you and your new beneficiary may escape paying any income tax at all on the distributions.

Employer-sponsored tuition assistance/reimbursement programs

Tuition assistance programs are one of the more highly touted benefits a company may offer, but they’re often the most misunderstood. If you’re contemplating returning to school to either hone your existing skills or to branch off in an entirely different direction, check with your supervisor and with your personnel or human resources office to see how much, if any, your company’s program may cover. You may be pleasantly shocked to find that, even though you’re taking a course that seems to be completely unrelated to your job, your company may feel that your new skills add value to the company, so it will cover at least a portion of your expenses.

Check out Chapter 3, which has a section on part-time and summer jobs, for ways your student can help out here.

Be prepared to pay the full cost of any course you take upfront, whether you pay cash or use a credit card. Most companies will reimburse you for your tuition expenses only after you successfully complete the course, not before. Also keep in mind that they usually expect a grade of a C or higher for reimbursement.

Scouting local civic groups

What do the Elks, the Moose, the Knights of Columbus, the Daughters of the American Revolution, and the Chamber of Commerce all have in common? They all provide prizes and awards to deserving high school seniors, who are nominated for the award either by their teachers or by members of the organization who are familiar with the students and their work.

Scholarships may be given for academic excellence, athletic prowess, or community service, depending on the organization. Some of these awards are in the form of books, but others are cash. The checks are generally made out directly to the student, not to the university that the student will be attending the following fall. These small scholarships may provide your student with necessary money to buy incidentals that often aren’t covered by a university scholarship program but are necessary purchases nonetheless.

Competing for corporate-sponsored awards

You may be familiar with the Miss America and Miss U.S.A. pageants and know that these young women receive scholarships from these organizations to further their educations. What you may not realize is that other types of corporate competitions (that don’t require parading around in a swimsuit in front of a national television audience), open to both genders, offer similar benefits to the winners. These competitions don’t require that you work for a particular company or business in order for your child to compete; in fact, if you’re an employee, your child may not be eligible (check the entry rules).

Corporate scholarships, such as those offered by Best Buy, Burger King, Coca-Cola, Calgon, and the Discover Card, among others, can be very lucrative if you manage to nab one. The first-place award often is more than enough to cover all the expenses for a single year, but even runner-up prizes can be worth thousands. Awards are usually made for only one year at a time. Some are renewable annually, provided your student kept up his grades. Others are good only for a single year; if students want further funding from that source, they’ll have to apply for it each year they’re eligible.

Corporate competitions are competitive — don’t let foolish errors trip up your student’s application. Read the entry requirements carefully, and follow them closely. If the application must be postmarked by October 31, don’t mail it on November 1 and hope that officials won’t notice — they will.

You may access lists of what corporations sponsor competitions, what the general requirements are for each, and how much money is at stake through a variety of Web sites. Plug scholarship into any search engine to access a list. Good places to start are at www.scholarships.com and www.fastweb.com , although new Web sites sprout almost daily in this very popular area. Libraries may also have books that give you this information, although the information in the books may not be as current as the Internet info.

Tracking down charitable foundations

The United States has thousands upon thousands of charitable foundations, and most of them are completely obscure. In fact, many of them, according to the terms of their establishing documents, can’t give scholarship money directly to students. Instead, they must set up scholarships through another organization, such as a college or university. Check with your student’s financial aid office to obtain a list of these charities.

Some charitable organizations, however, do provide scholarship and fellowship money directly to students to help defray the cost of education. Unfortunately, finding these organizations may be difficult (because many keep a very low profile). Still, you can locate them. Here are some suggestions:

Check with your state’s attorney general. The AG’s office in each state usually keeps a list of all organized charities operating within the state. They’re obligated to provide annual reports, and this information is available to the public.

Check with regional associations of grant makers. Their lists may not be as complete as the one you get from the attorney general because charitable foundations don’t have to register with them, but this may be the easiest way to access information from charitable foundations around the nation. Remember, if you can find a local foundation that’s giving away money for schooling, your chances of snagging a scholarship from them may be greater than from a national charity because you’re competing against a smaller pool of applicants.

Search the Internet. Not every charitable foundation has a Web site; in fact, most don’t. But you can often find the major charitable foundations that do provide scholarship assistance on the big scholarship search Web sites, such as www.scholarships.com and www.fastweb.com.

Snagging state and municipal scholarships

You may or may not want your tax money spent on scholarships, but most states and some cities and towns provide some scholarship aid to some of their neediest students. Even if you’re not sure that your child will qualify, there’s no harm in accessing the information and making sure.

If you’re not sure how to begin searching for these taxpayer-funded scholarships, the Internet is always a good place to begin. You can plug in your state’s (or town’s) name and scholarship into any search engine and come up with a fairly extensive list of what’s available to you from local sources. You should also check with your student’s guidance counselor for any smaller grants that may not have Web sites. And, last but not least, check with your state and local departments of education to see if they have any pertinent information for you.

Generally, when you do receive assistance from the state, some strings are attached — for one, your student must attend a public institution in that state, whether it’s a community college or a four-year college.

Acquiring College Funding in Exchange for Service

In these days of the all-volunteer military, you’ve probably seen recruitment ads on television that tout the benefits of the Montgomery GI Bill. Or, if you live in a major city, you’ll surely have noticed the red jackets of AmeriCorps, those primarily college-aged nonstudents who give up a year of their time to community service in communities all over the country in exchange for limited tuition assistance.

While these are two of the more visible examples of college tuition assistance available in exchange for the completion of a public service commitment, they’re not the only two. In all the examples in this section, either the federal or state government pays for all or a part of your education, while you give a period of service as a payback. Clearly, from the government’s position, this is a winning strategy — it gives higher education to people who otherwise might do without and gets services in exchange. But for many people who enroll in these programs, it also helps to solve what otherwise might be an unsolvable problem: how to pay for the education they need in order to begin the career they want.

You and your child should ponder a few points before embarking on this road toward financing your student’s education:

Your student may have very little control over what type of service he does and where he does it. While the military, the Public Health Service, and AmeriCorps try very hard to put people where they want to be, not everyone can play in the Marine Corps Band, fly fighter jets, or be in the Army Corps of Engineers.

Once your student actually begins to receive money, his window to back out of the deal closes quickly. Although the various branches of the service allow a freshman ROTC scholarship student to cancel his scholarship, once you move beyond that first year, your child has pretty much committed to fulfilling his military service obligation. The same holds true for loans with service obligations from the Public Health Service; although you can buy out of your service period, the cost far exceeds the actual amount you received.

The amount of money your student receives may not be enough to pay for the education he wants. Benefits from the Montgomery GI Bill generally pay for a four-year education at a public college or university, but you’ll come up short if your child’s greatest desire is to attend a private four-year college. Even with additional benefits available, you still won’t have enough, and you’ll have to make up the difference, either through savings, current earnings, or loans.

If you’re still game even after the warning, read on and find out more about your options.

Marching in the military

The military provides one of the best bargains around in educational funding. This is true whether your child enlists in a branch of the military or any state National Guard right out of high school, enrolls in the Reserve Officer Training Corps (ROTC) at her college, or is fortunate enough to obtain a nomination to a military service academy (West Point, U.S. Naval Academy, U.S. Coast Guard Academy, U.S. Air Force Academy, or the U.S. Merchant Marine Academy). In exchange for either active or reserve service in one of the four branches of the military or the merchant marine, your child will receive enough funding from the government to provide at least a bare-bones postsecondary education. In many cases, the educations provided by the military are some of the finest available.

Programs for active duty, reserves, and veterans

Several programs are available to military personnel who have completed a period of active duty and/or reserve duty, and other programs are open to veterans or their families. Among these are the following:

The Montgomery GI Bill: This bill provides a cash education incentive to either active duty personnel (after they’ve served one tour of active duty) or veterans for up to 36 months of postsecondary education, including, but not limited to, two- and four-year colleges, vocational and technical training, correspondence courses, apprenticeships/job training, and flight training. The amount your student receives is pegged to the length of his service and whether that service was active duty or reserve/National Guard duty. In addition, amounts he or she is eligible to receive are adjusted annually for increases in the cost of living.

Tuition assistance: Enlisted servicemen and servicewomen may use this aid to pay for secondary and postsecondary courses during the time that they’re on active duty (including reserve and National Guard duty). These benefits have an annual limit, but they may be supplemented by amounts from the Montgomery GI Bill.

Army/Navy/Marine Corps College Funds: This program is supplemental to the Montgomery GI Bill and may increase the amount of money the military will contribute to your child’s education. Awards aren’t automatic, and they’re not available to everyone; they’re made based on academic merit.

Community College of the Air Force: Open only to active-duty members of the Air Force, it offers primarily technical and scientific courses leading to an associate’s degree. The Air Force pays up to 75 percent of the cost of the courses.

Survivors’ and Dependents’ Educational Assistance Program: This program provides up to 45 months of educational assistance and/or vocational training to the eligible children and spouse of a veteran who has died or become permanently and totally disabled from a service-related incident, or who died after becoming permanently disabled, or who was either a prisoner of war or is currently missing in action. Benefits are provided to veterans’ children only between the ages of 18 and 26, and to the veteran’s spouse for a ten-year period from the date that spouse becomes eligible or from the date the veteran dies. If you think you, or your children, may qualify for this, you should contact your local Veteran’s Administration Office for all the details.

ROTC and service academy scholarships

These scholarships are available to college students who attend one of the five service academies or a college with an ROTC program. Upon graduation from either the service academy or the ROTC program, your student is immediately commissioned as an officer in one branch of the military, and he or she is committed to serving for a specific period of time, depending on the size and duration of the scholarship. A graduate from West Point, for example, is committed to at least five years of active duty and three additional years of reserve and/or National Guard duty. Because ROTC programs vary between schools, you should check with the ROTC recruiter at your student’s school about the after-graduation commitment for this program.

ROTC scholarships: These scholarships may vary in length from two to four years, and in amounts up to 100 percent of the tuition, fees, and expenses of a particular institution. These scholarships are intensely competitive; don’t assume that, because your student signs up for ROTC as a freshman, he or she will automatically receive one of these scholarships. You can find out about the general outlines of the ROTC scholarship programs at www.armyrotc.com or www.military.com. For more specific information about a specific program, you should contact the ROTC recruiter at the particular college your student is interested in.

Service academy appointments: These appointments provide a wonderful education and the assurance of a job at the other end. For that reason, they’re few and far between, and they require far more legwork on your, and your student’s, part to make it happen (not to mention the nomination of your U.S. representative or senator). In fact, all the service academies recommend that your student begin the application process in the spring of his or her junior year of high school. If your student is so fortunate as to get one of these appointments, he or she will receive the cost of full tuition plus a living stipend for the four years it takes to complete that undergraduate degree.

Helping others (and yourself) with AmeriCorps

A part of the Corporation for National & Community Service, AmeriCorps encompasses a network of national service programs and projects in a variety of areas, including health, education, environment, disaster relief, youth mentoring, elder care, and affordable housing. In fact, the list of programs under the umbrella is massive, and chances are good that whatever your, or your student’s, interest, you’ll probably find something there to suit it.

AmeriCorps can provide services in all these areas by tapping into the better nature of its volunteers. In exchange for an approximate one-year commitment (either full- or part-time), AmeriCorps may provide a volunteer with a modest living allowance plus health insurance, training, and a student loan deferment during that year if that volunteer has existing student loans. Volunteers who successfully complete their commitment become entitled to a modest education award that may be used toward college or graduate school or to pay back existing student loans.

AmeriCorps is open to U.S. citizens, nationals, and lawful residents. Provided the volunteer is over age 17, the program doesn’t have any age or education restrictions; you, or your student, may choose to serve at any time.

The services that AmeriCorps volunteers provide are, without a doubt, priceless in terms of providing needed services at very low cost. But that fact hasn’t prevented AmeriCorps from being caught in the crosshairs of annual budget fights between Congress and the President, who all agree that this is a wonderful program and then proceed to slash its funding. Because it does require appropriations from Congress to fund the programs and pay the volunteer stipends and education awards, you may not want to count on a huge number of available openings in AmeriCorps in the future. Still, if your student is determined to do something worthwhile with a year of her life and pick up some assistance for college, no matter how large or small, she could do a lot worse than spend a year here.

Getting paid by the Public Health Service

The U.S. Public Health Service provides various sorts of educational assistance, from loans to outright grants, to students who are pursuing careers in health-related fields. These programs are designed to provide access to these professions for underprivileged individuals and to entice students into health-related professions that are currently experiencing shortages.

Programs that are offered may change to respond to changing needs. Among the scholarships and low-cost loan programs currently available are the following:

Scholarships for Disadvantaged Students Program: Scholarships are available for financially needy full-time students enrolled in health professions and nursing programs who come from disadvantaged backgrounds. Scholarship recipients are selected by their schools and awarded full tuition costs plus a reasonable amount for education and living expenses.

Loans for Disadvantaged Students Program: This program provides low-cost, long-term loans to financially needy full-time students pursuing a degree in allopathic (Western) medicine or osteopathic (specializing in musculoskeletal therapy) medicine, dentistry, optometry, podiatry, pharmacy, or veterinary medicine. Loans may cover not only tuition but also reasonable expenses, as determined by the school.

Health Professions Student Loan Program: Similar to the Loans for Disadvantaged Students Program, this program provides long-term, low-cost loans to full-time, financially needy students in dentistry, optometry, pharmacy, podiatry, or veterinary medicine only. Loans may not exceed the cost of tuition and a reasonable amount for education and living expenses, and they’re awarded by the participating school.

Primary Care Loan Program: This program offers long-term, low-interest rate loans to full-time, financially needy medical students pursuing a degree in allopathic medicine or osteopathic medicine. Students receiving loans through this program must agree to enter and complete residency training in one of the primary care specialties within four years of graduation. They also must practice in primary care medicine for the life of the loan. Participating schools award these loans, which are not to exceed the cost of tuition plus reasonable educational and living expenses.

Nursing Student Loan Program: Long-term, low-interest loans are provided to full- and part-time nursing students pursuing any nursing degree, from diploma through graduate levels. Participating schools select loan recipients and the amount of each individual’s loan amounts, not to exceed the cost of tuition plus reasonable educational and living expenses.

Many of these scholarship and loan programs may be used for undergraduate degrees, but others may be used only for graduate programs. For more information regarding these programs, call your school’s financial aid office.

Looking at Tax Issues Regarding Scholarships, Fellowships, and Grants

Whenever your student receives any money in the form of a scholarship, a fellowship, or an outright grant, you need to determine whether some, or all, of that money is subject to income tax, payable by the student. If the money that the student receives is in the form of a loan, there are no tax consequences upfront, although as the loan is being repaid, some of the interest may be tax-deductible.

Financial aid officers are generally a pretty savvy group of people who have a great knowledge of tax issues surrounding students, but they may not have much idea of your personal circumstances. If your student receives a financial aid award that creates tax problems for you or for your student, don’t hesitate to contact the financial aid office and try to reformulate the terms of the award to either minimize or totally eliminate the tax implications. Although it’s best to make any changes before any money changes hands, you may still be able to change the terms of the award as long as payments remain to be made.

Figuring out what’s taxable and what’s not

According to the IRS, the following requirements must be met in order for the scholarship money not to be taxed:

The student must be a degree candidate at an educational institution that maintains a regular faculty and curriculum and has a regularly enrolled student body in a place where it carries on its activities. In other words, your student may attend a primary, secondary, or post- secondary school, and whether or not she ever receives her degree, she has to be working towards one. Scholarships for continuing education courses that don’t lead to a degree won’t qualify here; neither will fees that you pay to audit a course.

The scholarship or fellowship payment may not be considered as payment for services performed. Money received for a research or teaching assistantship generally is taxable, but money received as tuition reduction is not.

The money has to go toward tuition and/or required fees and expenses. The student has to pay tax on all other funds that are used to pay for room and board and other living expenses. The fact that the organization granting the scholarship may not make this breakdown for you doesn’t mean that you don’t have to — you do. It’s your responsibility to keep track of both your expenses and the resources used to pay for them.

Table 16-1, based on IRS Publication 520, shows how the IRS breaks down what’s taxable and what isn’t:

Table 16-1 Tax Treatment of Scholarship and Fellowship Payments

Payment for		Degree Candidate		Non-degree Candidate
Tuition		Tax free		Taxable
Fees		Tax free		Taxable
Books		Tax free		Taxable
Supplies		Tax free		Taxable
Equipment		Tax free		Taxable
Room		Taxable		Taxable
Board		Taxable		Taxable
Travel		Taxable		Taxable
Teaching		Taxable		Taxable
Research services		Taxable		Taxable
Other services		Taxable		Taxable

Amounts received to cover tuition, fees, books, supplies, and equipment are nontaxable only if those expenses are required of all students in that course. For example, suppose that your student chooses to buy a computer that isn’t required but that makes his life easier and allows him to achieve better results than he would have without the computer. Even if your student receives an A when he might otherwise have received a B, he still has to declare the funds used to buy the computer on his income tax returns, and pay any tax due.

As you know, all rules have exceptions. Most scholarships and fellowships can be broken down into their taxable and nontaxable components fairly easily by using Table 16-1, but here are some special situations:

Veterans’ benefits, including any money that you receive through laws administered by the Department of Veterans Affairs, whether or not that money is used to pay for required tuition and fees or for living expenses, is tax-free.

All amounts received under the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program are tax-free even if you use a portion of that money to pay living expenses.

Qualified tuition reduction programs for graduate students that are provided in exchange for teaching or research are tax-free if the value of the fellowship is used to offset tuition charges. In other words, the student here is teaching or doing research in exchange for tuition, not in exchange for a living-expense stipend.

Dealing with self-employment income from fellowships

Even if your student needs to report a portion of his scholarship or fellowship to the IRS, chances are good that any income tax liability on that money will be minimal; after all, students are not famous for being high-bracket taxpayers.

Unfortunately, if your student receives a fellowship or stipend in the form of payment in exchange for research or teaching in excess of $400 (as opposed to tuition reduction), and if that student is not treated as an employee of the organization paying the money, she’s also subject to self-employment tax, the tax that any individual pays for Social Security and Medicare plus the matching amount that an employer would be required to contribute if you were employed by someone else.

And this tax really hurts — it’s a flat 15.3 percent (the 7.65 percent you always pay for Social Security and Medicare taxes plus the matching 7.65 percent your employer would normally pay) of 92.35 percent (your full self-employment income less the 7.65 percent employer match that you now have to pay) of your self-employment income. No itemized deductions or exemptions are allowed (although valid expenses incurred in the process of earning this money can be deducted). The self-employment tax isn’t graduated to be kinder to lower-income individuals, and you aren’t allowed to apply any credits against it. So a graduate student who receives a $500 stipend in exchange for creating the index for a professor’s book may well not pay any income tax on that money, but would have to cough up $70.65 to the IRS in self-employment tax. Your starving student will, no doubt, appreciate the fact that, 45 years down the road, she’ll be entitled to receive Social Security and Medicare because she’s made this payment now.

Claiming the Hope Credit, Lifetime Learning Credits, and tuition and fees deductions

If your student has to pay some tax on a scholarship, fellowship, or grant, he may also be eligible to take advantage of the Hope Credit, the Lifetime Learning Credit, or the tuition and fees deduction on his income tax return.

The precise rules of who may, or may not, use these credits and deductions, and to offset what expenses, are somewhat complex. The general point of all of them, however, is to give some tax relief to parents and/or students (depending on who is actually paying the education expenses) for the taxable income they’re using to pay tuition and required fees at a qualified college. You aren’t allowed to use expenses for room, board, books, supplies, and living expenses in order to qualify for the credit, and income limitations exist for all three — if the person trying to claim the relief is making too much money, the credit or deduction will be limited or eliminated altogether.

The basic outlines of these credits and deductions are as follows:

Hope Credit: This is a $1,500 credit (100 percent of the first $1,000, and 50 percent of the second $1,000) against qualified tuition paid per student in the first two years of postsecondary education leading to a degree. You may claim this credit for only two years for each student, and you may not also claim a Lifetime Learning Credit for the same student in a year in which you claim the Hope Credit.

Lifetime Learning Credit: This is a credit of up to $1,000 against the cost of qualified tuition payments at a rate of 20 percent (you need $5,000 worth of tuition expenses to claim the full credit). You may claim this for as many years as you have qualified expenses, but the credit is per tax return, not per student.

Tuition and fees deduction: Up to $3,000 of qualified tuition and fees paid to a qualified postsecondary educational institution may be deducted from gross income if you used taxable funds to pay for those expenses and if you don’t use those same taxable funds to claim either the Hope Credit or the Lifetime Learning Credit. You may claim this deduction for as many years as you like, the courses for which you’re paying tuition don’t have to lead to a degree, and tuition for all members of your family for whom you claim a dependency exemption qualify.

Just as you do with almost every other tax provision, be careful not to double dip and use the same expenses to try to qualify for both a Hope or Lifetime Learning Credit and the tuition and fees deduction. On the other hand, many people pay tuition expenses far in excess of what is covered by any one of these credits or deductions. If you have enough qualified tuition expenses for enough people in your family, you could be eligible for both credits and the tuition and fees deduction in a single year.

If you think that your educational expenses qualify for these credits or deductions, check out the latest edition of Taxes For Dummies, by Eric Tyson and David J. Silverman (Wiley Publishing, Inc.), for the precise details and what you need to do to claim these amounts.